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The
Economics of
Public-Private
Partnerships
ANDTHOMASW.
DE BETTIGNIES
JEAN-ETIENNE
Ross
SauderSchoolof Business
Universityof BritishColumbia
BritishColumbia
Vancouver,
INTRODUCTION
As
aroundthe worldstruggleto
governments
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TheEconomicsof Public-Private
Partnerships 137
fromfirmsthatearntheirincomesfromP3s or government agencies charged with promoting and
implementingsuch projects.While some of this is
enormouslyhelpful,therecan be no doubtthatindependentanalysesof the strengthsandweaknesses
of P3s are warranted.6
collectionprovidedby municipalemployeeswould
be anexample.Theprivatesector'sinvolvementhere
is limitedto selling collection trucksand gasoline
to the local governmentsanitationdepartment.
Government
interventionin thesecases cancome
in a numberof forms,differingin the allocationof
responsibilityandcontrolovertasks1 to 4, between
governmentandprivatesector.Whenit assumesall
the tasks,we have purepublicprovisionandwhen
some tasks are delegatedto the privatesector we
havevariousformsof contracting-outandP3s.
Public-PrivatePartnershipsand Optimal
PrivateversusPublicInvolvement
Even standardpublicprovisionof serviceshas traditionally involved partnershipswith the private
sector to at least a limited extent.9 However,as
mentioned,in recentyearsmanygovernmentshave
begunto considerexpandingthe use of the private
sector in the productionof public services. In the
broadestsense of the termthis is privatization,that
is, the assignment,to the privatesector,of control
over some decisionspreviouslymadeby the public
sector.10 It is common for the public sector to
performtasks 1, 2, and 4, possibly leaving task 3
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TheEconomicsof Public-Private
Partnerships 139
Ex Ante Competition
A key reasonfor the success of contracting-outat
reducing costs appearsto be competition:while
there will ultimatelybe only one providerof the
servicefor a certainperiod- andthereforeno competition "in the market"- the bidding process
As pointedout
allowscompetition"forthe market."
ex
ante
Demsetz
(1968)
competition
ago,
years
by
for the projectcan replacecompetitionin the market to forcebiddersto lowercosts, raisequalityand
be innovative.Unhappinesswiththeprivatecontractor can be punished the way the private sector
punishes:terminationfor cause, lawsuitsfor contractbreach,damageto reputation,andloss of future
business,etc. This does not happenwithpublicsector provisionof the service(whereeach department
hasmonopolypowerwithinits sphereof influence).16
High-poweredIncentivesand OptimalRisk
Allocation
The otherkey reasonfor the success of contracting
at reducingcosts is incentives-related.The private
sectoris generallyregardedas havinga greaterability to delivermoreinnovativeproductsmorequickly,
with more flexibility,and at a lower cost (not necessarily at a lower price) thanks to its access to
higher-poweredincentives.17
The oft-cited claim that P3s allow for a better
allocationof risks is but an exampleof the benefits
of higher-powered
incentives.The ideais thatsome
kindsof risks are best assignedto one partyor another.'8 In our view, optimalrisk allocationis all
aboutincentivemanagement,partiesshouldbe exposedto riskto the extenttheycanbest managethat
risk,whereby managewe meanmeasureand,through
theiractions,minimizetherisk.19If allriskwerepurely
exogenous,liketheweather,it wouldbe hardto argue
thatthereis anyadvantagein shiftingit to theprivate
arelikelytohavedeeper
sector(giventhatgovernments
pockets)exceptperhapsto insurancecompanies.The
to shifting,say,construction
riskto thepriadvantage
vate sectorpartneris thatbearingthis riskgives it a
strongincentiveto controlthoserisksthroughcareful
andhighqualityconstruction.20
Scaleand/orLearningEconomies
In additionto ex ante competitionandoptimalallocationsof risks,thereareothergoodreasonsto hire
privatecontractorsto constructfacilities.The most
importantrelates to economies of scale. Governmentstypicallydo nothaveenoughworkto generate
the volumes of business needed to allow a fullserviceconstructioncompanyto get unitcostsdown
to theirminimum,throughscale or learningeconomies.21 As Williamson (1979) pointed out with
referenceto the choice firmshaveto makebetween
internalandexternal(i.e., market)provisionof goods
andservices,the advantagegoes to the marketwhen
therearesignificantscaleor learningeconomiesthat
cannotbe achievedby thevolumeof businessrequired
by thebuyer(in thiscase the government).22
Contracting-outTheory,Efficiency,and
Incentives
Muchof the theoryon contracting-outhas focused
on the relationshipbetween ownershipstructure,
efficiency,and incentives,and in that sense relates
to, andformalizes,the ideasdescribedearlier.Here
we presentthe main directionsof researchon the
topic in recentyears.
Relationship-specificInvestmentsand
ContractualIncompleteness
Ex Post Inefficiencies. Considerthe design, construction,and operationof a bridge, hospital, or
school.23Whatdo these projectshavein common?
Onecommonalityis thatonce theprovider(thegovernmentemployeeor privatesector company)and
the customer(the governmentor taxpayer)startto
trade, that is, start to work together towardthe
completionof, say,a bridge,theyarebetteroff completing the project together than terminatingthe
relationshipandstartingto tradewithotherparties.
The reasonis that both the providerand the customer make relationship-specificinvestmentsthat
are morevaluableif the projectis broughtto completion than if trade breaks down. The provider
invests in buildinga bridge that correspondsspecifically to that particularcustomer'srequest (in
termsof location,design,equipment,timing,etc.).
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1
FIGURE
Procurement
of Public
Services
Optimal
RelationshipspecificAssets?
Yes
No
or
Complex
Uncertain
Exchange
Environment?
No
SpotMarkets
Yes
Contracts Vertical
Long-term
Integration
[P3]
[Public
Provision]
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TheEconomicsof Public-Private
Partnerships 141
Withoutrelationship-specificinvestments,there
are no transactioncosts and spot marketprovision
is thebettersolution:it allowsmoreflexibilityrelative to long-term contracts and it permits the
efficienciesassociatedwithcompetitionandprivate
provision.A good exampleof this would be food
stamps:the governmentprovidesa product(food)
that requiresno specific investment,via the spot
market(supermarkets).
When there are switching costs, two subpossibilitiesarise:long-termcontractsofferthebest
alternativewhenthe relationshipsremainrelatively
simple (e.g., building a bridge) such that writing
effective contractsis possible,but verticalintegration is sometimes necessary when transactional
complexitiesmake ex post inefficienciestoo large
(e.g., perhaps,some types of healthcare).
Ex Ante Inefficiencies. Note that although the
theoryon ex post inefficienciesprovidespowerful
insightsinto the advantagesof long-termcontracts
relativeto spot markets,andof integrationrelative
to long-termcontracts,respectively(the mitigation
and/oreliminationof ex post transactioncosts), it
remainsmore vague as to their disadvantages(inflexibility,bureaucracy).The following discussion
of ex ante inefficienciesshouldclarifythese issues
by formalizingthe trade-offbetweenbenefits and
costs for each organizationalstructure.
Recall that with relationship-specific investments, a situationof bilateralmonopolyarises, in
whicha surplusfromtradeis created;andthatwhen
contractsareincomplete,the tradingpartiesbehave
in theirattemptto appropriate
that
opportunistically
desurplus.The abilityto behaveopportunistically
on
ex
which
post bargainingpower,
pends greatly
itself dependson theparty'soutsidealternative,that
is, thatparty'spayoffin theeventnegotiationsbreak
down.Whena partyhas an attractive
outsidealternativerelativeto a tradingpartner,
he orsheis in a better
bargainingposition,sufferinga smallerpenaltyfor
thandoes the otherparty.
leavingtherelationship
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ertslowereffort.Publicprovisionthusleadsto lower
productiveefficiency.
Second,withprivateprovision,thegovernment's
commitmentto cut productionwhencosts are high
leads to too low a level of productioncomparedto
public provision. Public provision thus leads to
higherallocativeefficiency. Schmidtthus defines
the trade-offbetweenpublicandprivateownership
as follows: althoughprivateprovision generates
higherproductiveefficiency,publicprovisiongeneratesgreaterallocativeefficiency.
Hart,Schleiferand Vishny(1997) focus on the
muchdebatedtrade-offbetweenlowercost andlowering quality of service provision. Indeed, they
providethe formalfoundationfor the argumentthat
privateprovisionmaylead to moreefficiencyin reducingthecostof serviceprovisionrelativeto public
provision,butthismustbe tradedoff againsta lower
qualityof service.
Theirresulthinges on two assumptions:incomplete contractsand a positiverelationshipbetween
cost of serviceprovisionandqualityof service;that
is, loweringcost has a negativeeffect on the quality
of the service provided.The incompletecontracts
assumptionmakesownershipimportant:
privateprovision impliesthattheproviderownsits production
technologyandthereforehasmorebargainingpower
relativeto governmentthanif the service was provided by a governmentemployee. Thus, if the
serviceprovideris the privatesector,it will have a
greaterincentiveto investin cost reductionex ante,
and in equilibriumservice is providedat a lower
cost by the privatesector.On the other hand, the
privatesectorfails to internalizethe negativeeffect
thatcost reductionhason servicequality,andtherefore has too muchincentiveto reducecosts, to the
detrimentof servicequality.In Hart,Schleiferand
Vishny(1997), the privatesector has more incentive to producemoreefficiently,butso muchso that
it tries to "cutcorners,"which affects quality.The
choicebetweenprivateandpublicprovisiondepends
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TheEconomicsof Public-Private
Partnerships 143
on the importanceof productionefficiencyrelative
to this
"corner-cutting."'24
The Special Case of Public Goods
Besley andGhatak(2001) focus on the provisionof
a public good. They ask whether a public good
shouldbe providedby the publicsector,orby a privateentitysuchas a non-governmental
organization
(NGO),for example.The two partiesinvest in the
productionof the good and negotiateover the surplus created.In the simplestframework
providedby
Grossman
andHart(1986)andHartandMoore(1990),
if negotiationsbreakdown,theownergets somebenefitwhiletheotherpartygetsnothing.Becauseof that,
theownerof theassethasmorebargaining
powerand
and
incentives,
higher
transferring
ownershipto the
with
agent
highestmarginalefficiencyin investment
maximizesthe totalsurplusandis optimal.
When the good is public, however,both parties
enjoysomebenefitif negotiationsbreakdown.Even
if tradebreaksdownbetweentheNGOandthe governmentand the NGO is no longerinvolvedin the
developmentof the good, it still gets an "alternative"benefit, due to the publicnatureof the good.
Forexample,the NGOwithaneducationalmandate
mayget a benefitfromthe creationof a new school
even if it is not involvedwith its operation.
Besley and Ghatakdevelop a model where an
increasein the alternativebenefit(dueto investment
by one or bothpartiesex ante)raisesthe caringparty's valuationof that alternativebenefit morethan
the non-caringparty'svaluation.Consequently,an
increasein the alternativebenefitimprovesthe caring party'sbargainingpositionandexpectedpayoff,
relativeto the partythatcaresless, whose bargaining positionandexpectedpayoffhaveworsened.To
maximizethe total benefitin equilibrium,the allocation of propertyrights must thereforemaximize
the marginalimpactof investmenton the alternative benefitfor the morecaringparty,andminimize
the marginalimpactof investmenton the alternative benefitfor the least caringparty.
COMPLEMENTARITIES
ACROSSTASKS
DelegatingDesignand/orOperationsto the
PrivateBuilder
As mentionedpreviously,one of the key characteristics of P3s is that responsibilityfor two or more
tasksmaybe given to the samepartner.In particular, the design of the projectpriorto construction,
and/orthe responsibilityfor operationand service
provisionafterconstruction,maybe allocatedto the
builder.
The advantagesof privatizingtasks 1 and4 may
be similarto those associatedwith contracting-out
whichweredescribedearlier.Consider
construction,
scale and/orlearningeconomies,for example.It is
certainlytruethata numberof P3s (e.g., highways
withnewelectronictolling)involveprojectsthatare
novel for the governmentin questionbut may be
familiarto a largemultinationalcontractorthathas
workedon similarprojectsin otherjurisdictions.25
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TheEconomicsof Public-Private
Partnerships 145
The challenge,when the privatesectoris to use
the facility to provide the service, is in carefully
specifyingthe characteristicsof the servicethatthe
governmentcares aboutso that thereis no misunderstanding(ordeliberateexploitationof incomplete
contracts)betweentheparties.As withmanyaspects
of P3s, the contractingchallengeshere are significant - importantcharacteristicsof servicequality
must be measuredand verifiablestandardsof acceptableperformanceestablished.32Forthisreason
it is notsurprisingto see thatmanyjurisdictionshave
createdspecializedagenciesto reviewproposalsand
lay out contracttermsfor P3s. These groupsoften
functionas within-government
consultantson P3s,
andas repositoriesof knowledgeandexperiencethat
provide governmentswith the skills they need to
structureP3s to theirmaximumbenefit.
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Traditionally,
governmentsfinancedpublicprojects
either
fromcurrenttax revenuesor by
themselves,
borrowing.Perhapsthe most strikingaspectof the
new wave of P3s is the extentto which the financing is being handledby the privatesector.Indeed,
one of the most frequentreasonsgovernmentsemploy to justify theiruse of P3s is thatthey arecashstrappedand too debt-ladedalready,and therefore
need an infusionof capitalfromthe privatesector
if the projectis to proceed.While almostcertainly
true for many underdeveloped and developing
economies (where P3s have been used for some
time), the argumentis made more and more frequentlyby governmentsin developedeconomiesas
well.35
Criticsof P3s ask how it can be betterto let the
privatesector finance projectswhen governments
(at least thosein Canadaandmostof the developed
world) can borrowat lower rates of interestthan
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TheEconomicsof Public-Private
Partnerships 147
be able to borrowat 5 percent,but in fact over the
chance
courseof 20 yearsthereis a not-insignificant
it will be unableto meet its debtobligations.Thus,
a loan contractwith this privateborrower,say at 7
percent,is actuallya combinationof a loan plus an
option to "put"the remainingportionof the debt
backto the originallender.
The importantobservationhere is thatthe governmentdoes not get this putoptionwhenit pays 5
percent,it must repay the loan in full, no matter
what.This is not to say thatthe cost of borrowing
has to be identicalwhenwe takethe putoptioninto
account,it is just to point out that the listed rate
exaggeratesthe difference.37
The secondpointwe wouldmakeaboutthe rates
at which governmentand privatepartiescan borrow,is thatwith a solid, long-termcontractfroma
governmentbuyera privateborrowercanmostlikely
securea very good rate fromprivatelenders.Here
thegovernment's
reliabilityas a buyersubstitutesfor
its reliabilityas a borrower,with the resultthatthe
rateat whichtheprivatepartycanborrowis verylow.
Third,the privateborroweris able to deductinterestpaymentsandso reduceits tax burden.While
some of this savingmayjust be a transferfromthe
very governmentwith whichit is partnering,some
could be fromotherlevels of government.For example,in Canadathe tax savingscome, in part,at
the expenseof the federaltreasury,while the public
sector partnermightbe a provincialor local government.While from the standpointof national
wealththese arenot real savingsin resources,from
the perspectiveof the partners(includingthe provincialor local government),someportionsof them
are,andtheyfunctionas a formof subsidyfromthe
other level of governmentavailable only if the
projectis privatelyfinanced.
Fourth,when we recognize that governments,
particularlysubnational(e.g., provincial)ones, can
get themselves into serious financial troubleand
even possibly face bankruptcy,we know thatthey
BetweenFinancingand
Complementarities
OtherTasks
Possibly moreimportantthanthe relativecosts of
publicversusprivatesectorborrowingaretheeffects
thatbeingthedebtorhason one'sincentivesto highlevel performance.39
It is verylikely thattherewill
be importantcomplementaritiesassociated with
combiningthe financingtask with the construction
task.40
andpossiblyalso theoperation/maintenance
If a privatepartnerchargedwithconstructingthe
facility mustalso provideits own financing,it will
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SUMMARY
ANDDISCUSSION:
LESSONS
LEARNED
TOTHISPOINTANDQUESTIONS
FOR
FUTURE
RESEARCH
Our review of the relevanttheory and experience
has suggested a numberof lessons regardingthe
conditionsunderwhich P3s become a particularly
desirablealternativeto traditionalmethodsfor the
provisionof public services. To briefly repeatthe
most significanthere:42
Ex ante competition. A substantialfractionof
thebenefitsfromprivateprovisioncomesfrommarshalling the pro-efficiencyforces of competition.
Since the ultimateproviderof any serviceswill almost certainly become a monopolist, this
competitionwill have to be ex ante - at the biddingstage.If therearenotenoughcompetentbidders
or biddingconsortiato makethe processcompetitive, thereis less of a guaranteethattaxpayerswill
get value for money.43
Scarce skills. In many cases the privatesector
will have skills not availablein the publicsector.If
these skills will be requiredthroughoutthe life of
the projectand it is hardto separatethe provision
of these skills fromthe operationof the project,the
governmentmay need to allocate these tasks to a
privatepartnerwho not only has the skills, but (because of its "ownership"of the project)also the
incentiveto performat a high level.44
Poor labour relations. Wherethe publicsector
environmenthas not produced
labour-management
efficientandflexiblelabour
an appropriately-skilled,
force,the privatesector(againthroughthe forcesof
mayofferconsiderableadvantages.
competition)
Innovation.Whenthe projectcalls for innovative thinkingandnew approaches,mostwouldturn
to privateproviders.Of course, it is possible that
only somepartsof the project,say the architecture,
needbe innovative.In such a case it maybe best to
contractout only thatpart.The extentto whichthe
whole projectshouldbe a P3 will depend,in part,
on thecomplementarities
betweenthe tasks(see the
pointson complementarities).
Risks. Whenmost of the majorrisks are things
the privatesectorcan manageas well or betterthan
the public sector,P3s become moreattractive.For
risk is somethingthat
example,construction-delay
the contractorcan managebetter than the public
partneranda P3 in which the contractor(or a consortiumpartner)also becomesthe operatorgives it
the incentiveto minimize such risk. On the other
hand,"politicalrisk"is bettermanagedby the public sector.
Economies of scale. If the privateprovidercan
take advantageof economiesof scale (andperhaps
scope)fromtheoperationof similarprojectsin other
(perhapsnearby)jurisdictions,the P3 option becomes more attractive.45
CANADIANPUBLICPOLICY- ANALYSEDEPOLITIQUES,
VOL.XXX,NO. 2 2004
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TheEconomicsof Public-Private
Partnerships 149
In some cases, however,it will be very difficultto
define, measure,and verify qualitylevels, making
the privateparticipationproblematic.
Complementarities. When physical facilities
suchas bridgesor buildingsneed to be constructed,
it is prettymuchstandardpracticefor governments
to turnto privatecontractorsto do the work,taking
advantageof their economies of scale. In some
cases, the constructionis the only task contracted
out, but when there are strong complementarities
with other tasks it becomes efficient to have one
provider(or tightlyorganizedconsortium)responsible for the set of connectedtasks. This is most
frequentlyobservedwith the design task (or parts
of it) tied to the construction,butincreasinglyother
are being recognized.
complementarities
Constraints on public sector borrowing. We
have seen thatif furtherborrowingrisks a deteriorationof a government'screditrating,the marginal
cost of borrowingcanbecomeveryhigh.Inthiscase,
allocatingthe financingtasks to the privatesector,
which might face a lower marginalborrowingrate
(even thoughits averageborrowingrate might be
higher),maylowerborrowingcosts. Casesin which
thegovernmentsimplycannotborrowat all (as with
some developingcountriescarryingenormousdebt
loads) are obvious,if extreme,examples.
While we would arguethat partnershipsshould
be embracedonly when they allow governmentsto
provideservices of an acceptablequalityat lower
cost to taxpayers/consumers,
other- sometimesless
noble- objectivesare frequentlyattributedto governmentsadoptingP3programs.Itmaybe argued,for
example,thatP3s area wayforgovernmentsto avoid
public sector labourunions, to move debt off the
government'sbalance sheet, to hide information
fromthe public,or to deflect blame.46
Despite this learning there is much we do not
knowaboutthe optimaldesign of P3s andtheirtrue
efficiencybenefitsor costs. To stimulatefurtherresearch in this importantarea we suggest a few
NOTES
Theauthorswouldlike to thankNeil Alexander,
Tony
RonGiammarino,
NicholasHann,Robert
Boardman,
andparticipants
attheUBCCenHelsley,TsurSomerville
tre for the Studyof Government
andbusinessPublic
(23April2003)forhelpfuldiscussions.
PolicyLuncheon
useful
comments
andguidancewerealsoprovided
Very
- ANALYSE
CANADIAN
PUBLIC
POLICY
DEPOLITIQUES,
VOL.XXX,NO.2 2004
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is containedin Rosenau(2000).
policy partnerships
discussionfocusedon P3s for in7A complementary
frastructure
is foundin DanielsandTrebilcock(1996).
8Withthe abilityto costlessly assess tolls for roador
bridgeuse, these problemsneed not arise. However,at
leastuntilrecently,thecost of collectingtolls in termsof
and lost time to travellerswas
manpower/administration
substantial.
91fwhatthe public sectoris buyingis a moreor less
standardproduct,buying constructionservices is not
reallydifferentfrombuyingoffice suppliesin the regular
market,with the implicationthatthe term"partnership"
is probablynot appropriate.
'00f course,if it is a new service not previouslyofferedby governmentit is privatizationonly in the sense
thatit involvesgreaterprivatesectordecision-making
than
the publicenterprisealternative.
"In some cases, the public sector may even do the
construction:some governmentshave road crews for
buildingand maintainingroads,for example,and many
will havecrewscapableof at least small-scaleconstruction andrenovationprojects.
'2Thesurveys, for Americanlarge cities by Dilger,
MoffettandStruyk(1997) andfor BritishColumbiamunicipalitiesby McDavidand Clemens(1995) show that
themostcommonlycontracted-out
servicesinclude:solid
waste collection,vehicle towing,streetrepair,janitorial
services,andlegal services.
31Inprinciple,all of these could be specified in the
contractwith the sponsoringgovernment,but certainly
some decisionswill remainwith the privateprovider.
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TheEconomicsof Public-Private
Partnerships 151
in some cases, the traditionalpublicsec16However,
torprovidermaybe permittedto bid for contractsagainst
the privatesector providers.For example,UnitedKingdom (2003b)reportsthat,for the managementof prisons
in the United Kingdom,the PrisonService has recently
acceptedin-house bids (in competition)to replaceprivate sectormanagementat two prisons.These bids were
successful,in partbecausemoreflexible staffingpermitted the in-housebidderto lowerits price.
'7Thereis some evidencethatthe privatesectordoes
in factdeliverprojects.more
quickly,as proponentsclaim.
TwoUK studiesareworthmentioningin this regard.The
first, by the NationalAudit office is discussed further
below (UK 2003a). The second,preparedfor HMTreasuryby MottMacDonald(2002) studied"optimismbias"
("the tendencyfor a project'scosts and durationto be
underestimated
and/orbenefitsto be overestimated")
and
foundless bias in P3 projects.
'18Examplesof the kindsof risksto be allocatedin infrastructureprojects,as describedin Poschmann(2003),
include:(i) technicalrisk(e.g., engineeringor designfailures); (ii) constructionrisk (e.g., higher than expected
costs); (iii) operatingrisk (e.g., morecostly or difficult
to operatethanexpected);(iv) revenuerisk (e.g., lower
thananticipatedlevelsof demand);(v) financialrisk(e.g.,
debt management);(vi) force majeurerisk
inappropriate
(e.g., acts of war,naturaldisasters);(vii) regulatory/political risk (e.g., changes in laws that make continued
risk(e.g.,
operationless profitable);(viii) environmental
risk of significantenvironmentaldamageand liability);
and(ix) projectdefaultrisk(e.g., failurethroughanycombinationof these risks).
thathavebecomeunprofitable
(thoughif theyhaveposted
a bondof some sort, this too will carrya cost), butat the
end of the day it is the publicpartnerthathas to see the
service provided.Thus the privatepartnercannotcredibly committo providethe service in all circumstances
andthepublicpartnercannotcrediblycommitto not provide the service underany circumstances.
211tis importantto recognize that there is a "local"
componentto constructionmarkets.It wouldnot be easy
to move crews and equipmentacross vast distancesjust
to keepthembusy.Thus,evenif a government
hadenough
businessin total to allow a firmto achieveefficient levels of production,the costs of moving the capacityto
whereit was neededcould well be prohibitive.
22Thereis the possibility,of course,of a governmentowned construction company achieving its scale or
learningeconomiesby takingon additionalbusinessin
the privatesector.(This was the conceptbehindthe British Columbiagovernment'sill-fated attemptto build
high-speedferries for its own Crowncorporation,BC
Ferries,andalso for marketsaroundthe world.)This is a
good way for a governmentto makeenemiesin the private sectoras those firmsare likely to find it unfairthat
they competeagainsta firmfor privatesectorwork,but
they arenot allowedto bid on publicprojects.
23SeeHart(1995), Hartand Holmstrom(1987), and
HolmstromandTirole(1989) forexcellentsurveysof this
literature.
24SeeKingand Pitchford(2000). They too deal with
optimal(publicor private)ownershipin a frameworkrelated to that of Hart, Schleifer and Vishny. King and
Pitchford'scontribution
comesfromthegeneralityof their
model whichenables themto determineoptimalownership as a functionof (i) the marginalimpactof efforton
asset value, which can be positive or negative,and (ii)
positiveor negativeexternalities.
25Thisrole of the privatecontractor- bringingexpertise - is especially critical in less developed and
developingcountrieswherethe necessaryexpertisemay
just not be easily acquiredwithin government(or anywherewithinthe country).FourieandBurgersuggestthat
in SouthAfrica,"alackof management
capacityin governmentis a primeargument
fora PPPinitiative"(2000,715).
261nthe privatesector,firmsthatareunderperforming
can be sold to otherownerswho can profitby fixing the
CANADIAN
PUBLICPOLICY- ANALYSEDE POLITIQUES,
VOL.XXX,NO. 2 2004
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TheEconomicsof Public-Private
Partnerships 153
42Onelesson not listed below,becauseit has moreto
do with political thaneconomicconsiderations,may be
worthnoting nonetheless.To the extent that voterswill
acceptuser-paysystemssuch as tolls morereadilyif the
toll revenueis going to a privateconcessionairerather
thantheirgovernment,publicofficialscommittedto userpay to finance the project may determine that a P3
structurewill meet less publicresistance.
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